Germany looks to repatriate gold; less trust in Fed?

MADRID (MarketWatch) — Goodbye, Big Apple. Adieu, Paris. It seems the Bundesbank could finally be ready to bow to some longstanding public pressure and bring its foreign gold reserves home.

Germany’s Handeslblatt newspaper claimed Monday night that the Bundesbank has developed a new strategy that involves fewer gold bars flung afar. The original reason for holding its gold at the New York Federal Reserve and other central banks — in places for decade as a measure of security — no longer holds, the newspaper said.

The relationship between a central bank and its gold are closely watched by gold investors, since central banks hold so much of the world’s bullion supply. The Bundesbank’s expected move, and the possibility of more details, renewed questions over the size of the central bank’s holdings and what it plans to do with it -- particularly as Europe wrestles with a prolonged economic crisis.

“People have gotten a sense of how bad things could become and gold is the ultimate means of payment. The euro won’t last forever, [and] gold, for various reasons, is the anchor,” said Thorsten Polleit, Frankfurt-based chief economist at Degussa, a precious-metals firm.

What’s more, the report sparked a flurry of speculation that Germany had grown more uneasy with its U.S. counterpart, whose government is meanwhile facing a fierce fight over raising the debt ceiling.

At a time when trust in official institutions is waning, “perhaps your reserve assets are safer at home — after all, the U.S. reaches a debt ceiling in about six weeks’ time and failure to see it extended would put the U.S. and the dollar in default,” said Ross Norman, chief executive of precious-metals news and information provider Sharps Pixley, agreed the Bundesbank can’t be blamed. Read Der Spiegel on Germans fretting about their foreign gold reserves.

Lifting the veil

The public has been long demanding an audit of the German gold reserves and repatriation of those reserves, Degussa’s Polleit said. Some fuel was thrown on that fire in the last year by the financial crisis.

But the Bundesbank traditionally keeps a veil of secrecy around gold. It hasn’t had its worldwide reserves audited down to the last bar for decades, if ever, Polleit noted. So it may be a bit of a mystery just what is in the vaults of the New York Federal Reserve, which holds a 45% chunk of Germany’s gold reserves. The Bank of England and the Bank of France hold 13% and 11% each. The Bundesbank itself holds 31% of those reserves. See more on the Deutsche Bundesbank's gold holdings as per Dec. 31

Deutsche Bundesbank

By country, Germany has the largest gold holdings behind the U.S.

“In recent years it’s been quite popular to swap gold stocks for holding government bonds. ... There’s no exact data but some fear gold could have been lent out. It might still be there in physical terms but its kind of hard to decide who is the actual owner,” said Polleit. He said the Bundesbank has said some bars might have been checked, but not the total stock. Read what the Bundesbank had to say about auditing last October.

Still, Polleit isn’t expecting some “aha” moment from the Bundesbank to have any effect on physical prices. He expects gold will hit $2,070 an ounce this year on the view that governments are printing ever great amounts of money.

On Tuesday, gold futures
US:GCG3
traded above $1,680 an ounce on the Comex division of the New York Mercantile Exchange, poised to finish at a nearly two-week high. See: Gold, platinum near par.

Rationalizing the move

The central bank’s moves also raised the notion that trust was deteriorating among the world’s big central banks, even between close allies.

While it’s “one thing for a ‘crazy, lunatic’ dictator such as Hugo Chavez to pull his gold out of the Bank of England, it is something entirely different, and far less dismissible, when the bank with the second most official gold reserves in the world proceeds to formally pull some of its gold from the bank with the most,” wrote financial blog ZeroHedge. Read article on ZeroHedge

In 2011, Venezuela’s combative president Hugo Chavez ordered the repatriation of 85% of the country’s gold reserves, mostly from European central banks, a move Chavez said would protect his nation’s bullion in times of economic turbulence.Read more on Chavez's gold repatriation.

The notion that the Federal Reserve can’t be trusted to protect a nation’s wealth is a familiar one in the gold market, where some buyers have sought an asset protected from what they view as dangerous monetary policy that will eventually impale the U.S. dollar .

The Bundesbank bringing its gold home isn’t a negative for the market -- just the contrary, said Carsten Fritsch, senior commodity analyst at Commerzbank AG.

“If at all, than it shows that confidence in gold is rising,” he said. “Gold is the currency of last resort. It is therefore better to have it at home.”

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